Freedom in a Nutshell (Part Two - Conclusion)

Kenneth W. Ryker is the Academic Dean of Northwood In­stitute of Texas, where he teaches the philosophic basis of Ameri­can life and business and free market economics. The author of some two hundred articles and several booklets, he lectures widely on the philosophy of free­dom and the threats to individual freedom in America today.

He is the Director of The Free­dom Education Center on the campus of Northwood Institute, Cedar Hill, Texas. The Center is dedicated to promoting a better understanding of the philosophy of freedom and provides an ex­tensive repository of revisionist historical material available to freedom-oriented researchers.

There are three major components of capitalism, the individual enter­prise system. In the order in which they will be discussed, they are: (1) private ownership and control of property; (2) the free competitive market; and (3) the profit motive. Each of these is an important part of the whole system; interfering with the free working of any one of these will produce unfortunate economic consequences affecting everyone.

We have seen previously that there is only one type of rights: human rights—which are charac­terized as the rights to life, liberty and property. It will be noted that the right to life is basic, with the others really being an extension of this right.

To help understand the relation­ship between these rights, consider this: Who disputes that man has a right to his life? If it is conceded that he does, then does it not follow logi­cally that he has a right to sustain his life? This he does with the fruits of his labor.

Are the fruits of one’s own labor not his property? Who else has a right to them? If we agree that they are indeed his private property, have we not also agreed that this is necessary for the very sustenance of his life?

Thus, have we not agreed that to infringe on man’s right to property is to encroach on his right to sustain his life and hence to his right to life itself?

The cornerstone of our economic system is the concept of private ownership of property, which we have seen is traced directly to man’s inherent right to own the fruits of his own labor.

Freedom to dispose of one’s prop­erty as one sees fit is the essence of the property right. Ownership im­plies more than the obligation to pay the taxes on property; it implies con­trol!

If you do not control your prop­erty, you do not in fact truly own it. Whoever controls it in truth owns it, be it government or whomsoever. And if this be the case, your prop­erty has in fact been expropriated without due process of law and without just compensation.

To the degree that you have lost the freedom of disposition or control of your property, to that degree you have lost your property rights; to that degree you are a slave.

Producers, thus robbed, develop a slave psychology and production de­clines. The inevitable consequence of such circumstances will ulti­mately be a slave society.

When considered from the view­point of disposition, it is abun­dantly clear that property rights are basic human rights.

When man has the exclusive right to his production, he is free to dis­pose of it as he wishes. This makes possible the principle of willing ex­change. When freedom to exchange private property exists, liberty is secure. When private ownership is denied, freedom will perish. Attacks on individual liberty are always ac­companied by inroads on property rights.

7. The Free Competitive Market

The basic idea of the free market, willing exchange system "is that if we are left free to choose what we want most, we’ll get the most of what we want." The only alternative to this system of free choice is one in which government uses coercion to compel choice.

The free market system is proba­bly the most important element of a voluntary economy. Under such a system man exercises the highest degree of economic freedom as he guides production and consumption through the expression of his wants.

The satisfaction of the wants of consumers is the sole purpose of economic production. The finest method ever devised for guiding production is the free price system. Through this system our millions of consumers, through their purchases or refusals to purchase, actually "vote" for or against the production of all the millions of items produced in America.

Coping with Complexity

The argument is sometimes ad­vanced that our economy is so com­plex that we must have central planning by government. Actually this is the best reason we should leave the market alone. The more complex it becomes, the more impor­tant it is to leave economic calcula­tion to the individual decisions of consumers in the market place.

In the free market the price is a signal to everyone involved in pro­duction of a commodity: producers, consumers and distributors.

Through their subjective value judgments, as expressed by the prices they are willing to pay, con­sumers determine what items will be produced and how many; who will produce them, where and how.

One of the many superiorities of the market system over socialism, or the planned economy, is its ability to allocate rationally the factors of production.

In the free market prices direct all economic production. Because there are no free market prices under socialism, there is no rational means of directing economic production.

It has often been said that under the American system the consumer is king. This is certainly true, for what customers buy or do not buy determines what will be produced, and in what amount.

These purchases also determine the prices of all goods and services, and even of the factors of production, land, labor and capital. They deter­mine whether businessmen make a profit or a loss. Customer purchases also set the rate of interest for loans and determine the income of every individual from the bellhop to the movie star.

Yes, the customer is indeed king in the free market. As Dr. Ludwig von Mises stated in his Planned Chaos, "The Market is a democracy in which every penny gives a right to vote."8

Thus we see the price mechanism makes economic calculation possi­ble. Whenever government inter­feres with the price mechanism it replaces consumer preferences with government orders. The result is the very antithesis of economic freedom. This interference with market prices explains one reason for un­employment, as when government sets minimum wages at rates higher than the market values individual productivity.

It also explains agricultural surpluses which have piled up as price supports have pegged the price of agricultural products above what the market is willing to pay.

Individuals voluntarily exchang­ing the fruits of their own labor give rise to the free market. In simple societies the process involved was barter or trade, product for product. In our complex society, of course, we use a medium of exchange, money.

Exchange takes place in the mar­ket only when each party feels he will gain. A trade takes place only when one values what he receives more than what he gives up.

Money

The development of money has been a very important factor in the evolution of our economic system. Originally our money was commod­ity money, gold and silver coins; today it is only fiat money, numbers printed on pieces of paper or base metal slugs.

Money acts as a voucher which we receive for goods and services which we offer in the market and exchange for other goods and services. Or we may choose to save and invest some of these receipts.

Money has greatly simplified economic calculation and made pos­sible our rise above the bare subsis­tence level which is all that is possi­ble under the barter system of exchange.

Gold

The only way we can ever have a sound monetary system, and halt the erosion of the value of our sav­ings and investments by inflation, is by a return to a market designated money, such as a gold standard.

A monetary system based on the gold standard is self-regulating, re­quiring only the freedom of individ­uals to buy, sell and use gold in exchange. The great value of the gold standard is its disciplinary power over government. When peo­ple are free to exchange their cur­rency for gold on demand, govern­ment is limited in its inflationary tendencies. This in turn prevents broad distortions of the economy, business cycles of boom and bust, by limiting credit expansion.

The causes of such "depressions" were explained by Dr. Ludwig von Mises in The Theory of Money and Credit, first published in 1912. In a review of the latest edition of this work Dr. Hans Sennholz, noted economist and financial analyst and protege of Dr. Mises, summarized this theory as follows:

Professor Mises’ trade cycle theory in­tegrated the sphere of money and that of real goods. If the monetary authorities expand credit and thereby lower the interest in the loan market below the natural rate of interest, economic pro­duction is distorted. At first, it generates overinvestment in capital goods and causes their price to rise while production of consumers’ goods is necessarily neglected. But because of lack of real capital the investment boom is bound to run aground. The boom causes factor prices to rise, which are business costs. When profit margins finally falter, a recession develops in the capital goods industry. During the recession a new readjustment takes place: the malin­vestments are abandoned or corrected, and the long-neglected consumers’ goods industries attract more resources in ac­cordance with the true state of public saving and spending.9

As described by Dr. Sennholz in the preceding review, the Mises theory "continues to provide the only explanation of the rapid succes­sion of booms and recessions that continue to plague our system."

It is vitally important to note that such depressions and recessions are caused by "monetary authorities," which means they are caused by the government!

A practical plan to provide for a return to the gold standard, and thereby prevent these broad economic distortions, has been for­mulated by Dr. Sennholz. It involves the following gradual steps: (1) re­turn the freedom of everyone to trade and hold gold; (2) permit indi­vidual freedom to use gold in all economic exchanges; (3) guarantee individual freedom to mint coins; and (4) government establishment of unconditional convertibility of its money into gold.

Step by step the federal government has assumed control over our monetary system. It thus captured a potent source of revenue and a vital command post over the economic lives of its people. This is why every friend of freedom is dedi­cated to the restoration of free money which is also sound money. It is the gold standard.’°

One of the most important lessons we must learn is "that political con­trol over the money supply is the secret weapon of political control over the economic lives of the peo­ple. Money is only money, but free­dom is, or should be, beyond price. The hand that holds the purse strings is the hand that can compel obedience. The government that must ask the people for some of their money must be the servant of the people. The government that can take the people’s money through de­ficit spending can become the mas­ter.""

The use of money makes it possi­ble for consumers to compare vari­ous goods and services by means of their respective exchange ratios which we call prices.

These prices expressed in mone­tary units are in fact the heart of the market system because they make possible rational economic calcula­tion. Let’s examine this process.

Prices

We have previously stated that under capitalism the consumer is king, for by the setting of prices consumers actually direct the pro­duction process. Because prices are set by the laws of supply and de­mand, let’s analyze how this occurs.

The law of supply states that, other things being equal, the quan­tity of goods and services offered will vary directly with the price. If the price of tomatoes goes up, other things remaining the same, growers will attempt to produce more and the supply will increase.

On the other hand, the law of demand states that other things being equal, the quantity of goods and services purchased will vary in­versely with the price. If the price of tomatoes is raised and other things remain the same, fewer tomatoes will be bought.

In a free, competitive market, when supply and demand are per­mitted to interact without govern­ment intervention, price is estab­lished at the point of equilibrium between the two. Supply equals de­mand and there is no surplus or shortage. The market is said to "clear."

If, for any reason, demand for a good or service rises, the price will rise; if demand falls, the price will fall. Likewise, if the supply of a good drops, with demand constant, the price will rise; if supply increases the price will drop.

A low price is a signal to produc­ers to produce less and to consumers to buy more. High prices have the opposite effect.

This price mechanism is the mar­velous device in the free, competi­tive market through which all the people, the consumers, have a direct voice in the determination of the allocation of the factors of production—what will be produced, how it will be produced and who will produce it.

Increasing the Money Supply

When government intervenes in the market by increasing the money supply, consumers have more money to offer for a given amount of goods and services. Prices will rise because total demand has increased while supply has remained constant. Each individual dollar is worth less be­cause there are more of them. As a consequence, more dollars will be offered for a particular good or ser­vice.

When government meddles with the pricing mechanism, either shor­tages or surpluses will result. If the government institutes price con­trols, setting the price below the free market price, shortages will occur as demand will be high and supply low.

If government fixes prices above the free market price, as in the case of agricultural subsidies, supply will increase while demand decreases and a surplus is created.

Price is nothing more than an exchange ratio between the dollar and a unit of goods or services. When the consumer has more dol­lars, he values each dollar less. Prices then rise, not because supply has decreased, but because demand has increased—more dollars being pres­ent in the market.

An extremely important point to understand about money is that money is not wealth. What makes us wealthy, or increases our material welfare, is an abundance of goods, the result of production!

Perhaps an illustration will clarify this point. We know that prices are set by the laws of supply and demand. From these laws we know that as supply is increased prices will drop, or if demand is increased prices will rise.

Purchasing Power

These same laws apply to money, only in the case of money its price is referred to as purchasing power. If the quantity (supply) of money is increased the purchasing power of its unit will drop.

The objective on which we should focus our attention is increased material welfare, or a higher stan­dard of living. We have just ob­served that an increase in the quan­tity of money will not increase our wealth, as each unit of our money would then purchase less.

If, on the other hand, we de­creased the quantity of money rela­tive to available goods and services, the purchasing power of our money would increase. But this would have undesirable side-effects greatly outweighing the increase in pur­chasing power. This process is termed deflation and its conse­quences are as undesirable as those accompanying inflation.

There are other factors such as increasing population, more ad­vanced division of labor, and im­proved banking and business prac­tices which affect the exchange value of money. Even the attitude of consumers toward spending or sav­ing has a decided influence.

It should be obvious, however, that the market can operate with any quantity of money; it simply adjusts the purchasing power of the monetary unit accordingly.

Thus far we have discussed only the money side of exchange: supply and demand for money. Now let’s turn our attention to the goods side of exchange, for this is where the secret lies for improving man’s material welfare.

We have seen that prices can be lowered and the purchasing power of money increased, by decreasing the supply of money, but the same result can be attained by increasing the quantity of goods and services in the market. This has all the advantages and none of the disadvantages of deflation.

When the purchasing power of the monetary unit is increased and each dollar buys more, real income goes up. Because consumers can buy more with their earnings, their standard of living increases.

Thus we see that the secret of a high standard of living is tied, not to the supply of money, but to produc­tion of goods and services. Ever-increasing production is the road to prosperity and wealth.

Say’s Law

An additional benefit is derived from the operation of Say’s Law—production creating its own purchas­ing power.

Here’s how John Stuart Mill ex­plained it: "Could we suddenly dou­ble the productive powers of the country, we should double the sup­ply of commodities in every market; but we should, by the same stroke, double the purchasing power… every one would have twice as much to offer in exchange."¹²

Dr. F. A. Harper puts this phenomenon this way: "… Despite the fact that some goods and ser­vices are exchanged for others, and despite the fact that money may be used to facilitate these exchanges, what is bought still equals what is sold. Just as in one exchange the buying equals the selling because the same item sold by one person is bought by another, so likewise for the total of all trade in a complex economy, all buying equals all sell­ing.

"And this leads to the unavoidable conclusion that production creates its own buying power in a free economy. Sales equal purchases and purchases equal sales, in total for all trade as for a single trade. Only if the market is not free, only as free­dom to trade is interfered with, is this not true.’"

Competition Vital to Protect the Consumer

A major element of the free mar­ket is the principle of free competi­tion, vital because it is the force which protects the consumer. It is at work throughout the market economy, silently looking out for the best interests of all the people.

Competition is the pressure which forces producers to offer the best possible product or service at the lowest possible price, an essential to attract and keep customers when they are free to choose.

This competing between suppliers serves the best interests of everyone. In order to be competitive, the busi­nessman must produce efficiently, give prompt and courteous service, and provide a good product. If he does not stay competitive, he will lose his market and soon be out of business. It is in this area of compe­tition that profits accrue to the most efficient entrepreneurs.

Is this cruel, "dog-eat-dog," as the detractors of the free market system charge? On the contrary, it is only proper that inefficient producers should be weeded out by the market, for only in this way can consumers be served best. Who will claim that the inefficient should be subsidized by the consumer, and even by their competitors?

But competition is not limited to the businessmen who supply the needs of consumers; there is compe­tition between suppliers, competi­tion between workers for jobs, be­tween consumers as they compete to make their purchases. Competition permeates the entire market economy and is a healthy, whole­some, vital part of free enterprise!

Division of Labor

Were we each to produce all or most of the goods we consume, we would still be existing under a very low standard of living, as does most of the world today. Man has learned through experience that he can pro­duce more efficiently through cooperation with others than he can as an isolated individual.

This same experience has demon­strated that division of labor tre­mendously increases the production per unit of human labor used. When each of us can specialize on a par­ticular task, or a limited number of related tasks, we can do each better and faster, making possible greatly increased production.

The principle of the division of labor is based on the natural in­equality in the abilities of men, and the unequal distribution of natural resources.

It was man’s rational division of labor in production which made pos­sible mechanization of these simple tasks, previously done by hand, and ultimately launched us on the way to an affluent society.

Although a highly refined divi­sion of labor is essential to a high standard of living, it at the same time places a great demand on soci­ety for responsible conduct in economic and political affairs. The higher the degree of specialization, naturally, the greater the depen­dency of each of us on the other. This calls for the broadest possible view­point in considering policies. Nar­rowly conceived policies may benefit one group of workers or one indus­try, but can have serious conse­quences for millions of consumers.

Comparative Advantage

The principle of comparative ad­vantage simply means specializing in the production of those things for which one is best suited—doing what one does best—and letting others do the same. The exchange which results always maximizes the return from resources (factors of production), and results in an in­crease in the standard of living for both parties to the exchange.

We generally think of the princi­ple of comparative advantage in connection with international trade. Comparative advantage is simply the application of the principle of the division of labor to foreign trade. Because of this principle, it is al­ways to our benefit to produce cer­tain commodities in America, while importing others from abroad.

It is important to keep in mind, whether exchange takes place be­tween individuals or nations, that if freely arrived at, it always benefits both parties to the exchange. Exchange takes place only when what is received is valued more than what is given.

But specializing on the basis of comparative advantage takes place not only in the area of international trade, but at all levels of exchange: national, regional, local, and even personal.

It is a little known fact that the late showman, Billy Rose, was a world champion typist and short­hand expert. Without question he could type and take shorthand better than any stenographer he could employ. But did he do his own typ­ing? Certainly not! While a $60 a week steno was doing the typing, he could be earning $1000 as an impre­sario. This illustrates the principle of comparative advantage.

Free trade based on comparative advantage will maximize our stan­dards of living, while protectionism with duties and tariffs will reduce the material welfare of everyone.

8. The Profit Motive

The driving force in the free mar­ket economic system is the profit motive. Consumers control the mar­ket through their purchases, which determine which producers will make a profit and which a loss. Thus, the means of production are constantly being shifted from the inefficient to the efficient producers. Isn’t it only right that he who serves his customers best should be rewarded? Profit and loss are the devices which signify to busi­nessmen what needs of the consum­ers must be satisfied.

Production for profit requires pro­duction for the use of the consumer rather than the whim of an economic "planner," as only those producers who most efficiently satisfy the needs of the consumer will make a profit.

Profits indeed provide the incen­tive necessary to keep business prosperous and create new jobs. The incentive for a man to work is the wages he earns; the incentive for him to save a part of what he earns is the interest the bank pays; and the incentive for people to invest in business ventures is the profit they hope that business may earn. People will not risk their savings unless there is a good opportunity to earn a profit.

Under the willing exchange mar­ket system, failure to make a profit means no new capital for new and better production tools; no tools for improved products at lower costs—and no jobs. In a word, profit means everything!

What is it that induces a person to consume less than he produces—to save? It is the incentive of potential interest! Only when a person ex­pects to profit in the future will he do without—save—now.

Whittle away profit and people will not save and invest. If they don’t invest, there will be less funds for new tools, new factories, new products, and consequently there will be fewer jobs.

The greatest benefit a company can provide its employees is to make a profit. By the same token, the worst mistake organized labor can make is to use their coercive power to cause a profit squeeze.

There are basically five costs of doing business, one of which is prof­it. Let’s examine them briefly to see how it is possible to squeeze profit and consequently cause serious economic harm.

The first cost increment is that of supplies and services purchased from others; second is the total cost of payroll and employee benefits; third is the cost of depreciation, the provision for replacement of worn out and obsolete tools; then of course there are the ever-present taxes paidto local, State and Federal governments; and finally, if the business is efficient, there will be some profit left as payment to those who in­vested their savings in the company.14

Production

Man finds himself on this earth in a relatively harsh environment. In very few places does he find re­sources in abundance; almost uni­versally they are scarce. In any loca­tion, however, regardless of the availability of resources, man’s pri­mary concern is how to sustain life; only after this problem is solved does he concern himself with his liberty.

In sustaining and improving the quality of his life, man must pro­duce. He has only three elements with which to produce: land, labor and capital, which are known as the factors of production. For our pur­poses, it will be easier to understand their function if we call these fac­tors, natural resources, human energy and tools.

It is helpful to view these ele­ments in the context of a formula: Man’s Material Welfare equals Natural Resources plus Human Energy times Tools, or MMW = NR + HE x T.15

Our knowledge of the world about us tells us that natural resources are limited; so, too, is man’s energy. It is obvious then that if man is to enhance his material welfare signifi­cantly, it must be done by improving his tools of production.

It follows logically then that any act which contributes to an increase or improvement of tools of produc­tion will increase man’s material welfare. Conversely, anything that inhibits development of new tools cannot help but diminish his mate­rial welfare.

Man produces so he can consume. Thus he is both a producer and a consumer. It is obvious that if man consumes all he produces, his mate­rial welfare would remain constant. By the same logic, if he consumes more than he produces his standard of living would suffer. This latter situation is sometimes referred to as "eating the seed corn."

So we see that if man is to prog­ress, he must consume less than he produces. This difference, or surplus, is called savings and is used for investment in new tools of pro­duction. Only by continually improv­ing his capital, his tools, can man’s material welfare be increased, and only through saving and investing can he improve his tools of produc­tion. Only the hope of reward or interest will induce man to save. Hence, interest is essential to economic progress.

It is obvious then that anything that contributes to savings and in­vestment will improve our material welfare, and conversely, anything that decreases savings will decrease our standard of living.

In summary, profit (and interest) is vital to everyone in a free economy; to the owners because it means a steady income and larger dividends; to customers because it means more, better and new prod­ucts and lower prices; and to employees because it means better tools and equipment, better working conditions, higher pay and steady employment.

9. Conclusion

An attempt has been made in this simple analysis to distill the essence of the philosophy of freedom in the conviction that adherence to this philosophy is essential for an abun­dant life as free men. Deviation from these basic principles will tend to enslave and impoverish.

History teaches that the natures of man and government are diamet­rically opposed. If man is to be free, if his rights are to be inviolate, gov­ernment must be strictly limited to its only legitimate function—protection of those rights.

History has also proved conclu­sively that capitalism is the most effective, as well as the most humane system for solving the economic problem of scarcity.

Wherever free enterprise flourishes we find abundance and affluence. To whatever degree a so­ciety stifles the right to own and control private property, the free exchange of goods and services, the profit motive, and free competition—to that degree will the society suffer the problem of scar­city.

What then should be done in order that men may be free?

I would have government defend the life and property of all citizens equally; protect all willing exchange and restrain all unwilling exchange; suppress and penalize all fraud, all misrepresentation, all violence, all predatory practices; in­voke a common justice under law; and keep the records incidental to these func­tions. Even this is a bigger assignment than governments, generally, have proven capable of. Let governments do these things and do them well. Leave all else to men in free and creative effort.16

THE FREEMAN

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CURRENT ISSUE

December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.